The first day of September came and went with nary a peep out of the office of Alaska Gov. Bill Walker as to the fate of his beloved Alaska natural gas pipeline. The anniversary would be hardly worth noting but for what Walker said at the end of August 2016.
It was then he drew a line in the sand and went out of his way to publicize it in the pages of the Alaska Dispatch News owned by friend and supporter Alice Rogoff. September 1 was to have been the drop-dead date for Walker’s LNG-export project if no buyers for gas signed on.
“Walker sought the interview after weeks of seemingly bad news about the gas line, including reluctance by the producers to move ahead with the current project and a consultant report saying the gas line wasn’t competitive with other projects around the world,” reporter Alex DeMarban wrote in the story.
“(Walker) said the state will have an answer within one year whether the project can move forward — or not. If the interest is not there, the state backs off.
“‘If the market says, ‘You know what, you should have been here 10 years ago, or 20 years ago and we would have signed up and we’re not interested, (then) that’s it,’ (Walker) said.”
The answer the state had received from buyers as of Friday was “thanks for the offer” and silence. Despite the lack of firm commitments, however, cash-strapped Alaska is on schedule to spend about $100 million on the project this year and next.
When Walker this week announced plans to call the Legislature back into session in October to confront the state’s revenue shortfall, he made no mention of possible cost savings to be found by closing the state-run Alaska Gasline Development Corp. (AGDC)
The AGDC plan is for the state to one day own and run a gasline costing an estimated $45 billion to $65 billion to build.
Over the past year, there has been little real progress on the gasline project, but plenty of public spin.
“Governor Walker and his team first met Tokyo Gas President (Michiaki) Hirose in September of 2015, when Governor Walker spoke by invitation at the 4th LNG Producer-Consumer Conference in Tokyo,” the governor’s media statement said. “They also held meetings in November of 2016 in Tokyo.”
None of those meetings went anywhere, and since 2015 global LNG markets have only improved for buyers – in this case the Japanese – and worsened for sellers or would-be sellers – in this case Alaska.
Walker met with Korean political leaders in June.
The governor’s press office was big on that meeting, too, as was the Alaska Gasline Development Corporation, which parroted the governor’s statement on the meeting:
“Korea has been one of the largest consumers of Alaska’s coal, timber, and fish. President Moon (Jae-in) said he would like to add LNG to the list of imports, and offered his government’s support of the AKLNG project. I was pleased to hear President Moon say LNG will play a very important role in helping Korea combat climate change. I also told President Moon that, during my meeting at the White House, President Trump had expressed deep support for the export of LNG from the United States to Asia, including Alaska’s LNG.”
No purchase contracts were signed.
And then were the cheerful meetings with Chinese political leaders in April. Walker and Keith Meyer, the governor’s half-million-dollar per year gas-pipeline czar, entertained People’s Republic of China President Xi Jinping, First Lady Peng Liyuan and a gaggle of high-ranking Chinese officials for dinner after they stopped in Anchorage on the way home from a meeting with President Donald Trump in Florida.
“During dinner, President Xi mentioned the large scale of Chinese need for natural gas, saying his country has ‘100 years of demand.’ Mr. Meyer,” according to his office’s media machine, “replied, ‘Alaska has 100 years supply,’ iterating Alaska is the ideal partner to help China meet its energy needs.
“The project will enable Alaska to monetize one of the world’s largest proven natural gas resources. It is anticipated to create 9,000 to 12,000 jobs for design and construction with approximately 700 to 1,000 permanent jobs upon completion,” according to the official, Alaska, state pipeline office.
“The project will provide China with clean, reliable, and competitive energy for generations. Additional incentives for both governments to pursue the Alaska LNG project include climate change and the trade balance between the two nations.
“‘The Alaska LNG project offers tremendous upside potential for both Alaska and China,’ said Mr. Meyer. ‘We will put Alaskan’s (sic) to work, monetize the state’s vast natural gas resource, and provide China with clean energy to move forward. This is a win-win opportunity.'”
The marriage of Chinese gas demand and Alaska gas production sounds just about perfect. It has not been consummated. There is no sign it will be.
China Daily, the government-controlled newspaper, in July reported the country is unlikely to sign long-term LNG contracts with any U.S. gas suppliers anytime soon. China already has long-term contracts with Australia, Qatar, Indonesia, Malaysia, and Papua New Guinea – all of which are established LNG providers.
The Chinese have been buying an increasing amount of U.S. LNG, but only because it is cheap.
“Australia is lower (in price) than America and America is lower than Qatar in terms of average import price, therefore, American LNG has an obvious advantage in price,” Research and Markets reported in July. “From the perspective of transportation distance, it takes 10-12 days for Australian LNG while 15-20 days for Qatar to reach China. Australia and Qatar have large advantages over America.”
Alaska, at the moment, isn’t actually in the LNG game because it has no gas to sell. The hopes of renewing sales of gas from Cook Inlet to Japan vaporized in March when a Japanese company dropped plans to build a new LNG plant at Port MacKenzie just across Knik Arm from the state’s largest city.
The company cited the poor global market for gas.
Cook Inlet is Alaska’s historic gas province. It was part of a global effort to pioneer LNG. An LNG plant at Nikiski on the Kenai Peninsula was the largest such plant in the world when completed in 1969 and the first U.S. export facility to service the Asian market. Conoco-Phillips mothballed the facility in July.
Walker was nonplussed.
“We look at what the prices will be in 2023 and 2025 and there’s no question,” he told Anchorage’s KTUU.com “The economy of scale to a larger project is very different economically from a small-scale, small-volume project. So we’re very comfortable with where we’re seeing the market going and the economics of a large project.”
Buyers do not seem nearly so comfortable. None has signed to buy Alaska gas.
Construction of the pipeline and the liquefaction plant necessary to covert the gas for shipment by tanker is contingent on longterm contracts that will provide financiers the comfort they need to front the funding for what would be one of the country’s most costly construction projects.
Japan, South Korea and China are the largest LNG importers in Asia, according to the U.S. Energy Information Administration, a government entity. But their demand for LNG has actually been going down.
Long-term prospects in China do not look all that good with the Chinese now copying U.S.-pioneered exploitation of shale gas reserves.
“To further boost the clean fuel’s share in the country’s energy mix, measures have been taken to encourage imports and exploit domestic shale gas reserves,” the state newspaper reported. “China Petroleum and Chemical Corp., the world’s biggest refiner, also pledged to double its annual natural gas output by 2020 to reach 40 billion cubic meters.
“The company’s Fuling shale gas field, the nation’s first commercial shale gas production facility which was launched in 2014, will reach annual output of more than 10 billion cubic meters by the end of this year, it said.”
China is pushing hard to boost domestic production. It remains interested in gas imports, but only cheap gas imports. Alaska gas will not come cheap.
With the largest privately held petroleum companies in the world deciding last year that it would be best to slow the Alaska project in anticipation of improving market conditions at least a decade away, the state took over and charged on.
The state-owned gas company is on track to spend about $100 million this year and early next year on what The Motley Fool has labeled “The Alaskan Pipeline to Nowhere.” The Motley Fool is a website specializing in business and financial coverage.
The Fool’s assessment of nowhere came just after the state snatched control of the pipeline project from ExxonMobil, the largest and most successful of non-government-owned oil companies on the planet.
“BP, ExxonMobil, and ConocoPhillips remain partners in the project today and continue to weigh their options,” Fool reporter David Lettis wrote. “There’s no doubt that they all want to tap into the potential of bringing Alaskan natural gas to the open market. A lot of obstacles stand in the way, though, and Alaska’s proposal to take ownership of the pipeline project just adds another. Alaska and its potential third-party investors could cut into profits, thereby making natural gas production even less economical, and that’s assuming the state can find investors to begin with. This makes for a strong possibility that the Alaskan LNG pipeline will go unfinished or will be severely underutilized — which, by any definition of the phrase, would make it a pipeline to nowhere.”
Walker argues that a pipeline operated as a “port authority” can save money by avoiding federal taxes,but the chicken-versus-egg problem of finding pipeline financing looms large.
Financiers aren’t going to commit to fund pipeline construction unless there is some sort of guarantee buyers are there for the gas. But no sensible buyer is likely to commit to a long-term contract with an unknown builder to deliver pricey gas at a time uncertain when global gas prices are trending downward, and so much new gas has been found that projects cheaper than Alaska’s big adventure are being shut down because the market is flooded.
Malaysia-owned Petronas, the 19th ranked oil and gas country in the world, in July shelved plans for a $36 billion project in British Columbia, Canada.
Petronas issued a statement saying it remained “committed to developing their
significant natural gas assets in Canada” while conceding “the prolonged depressed prices and shifts in the energy industry” render the project economiclly unfeasible.
All energy analysts agree the demand for LNG is growing and will continue to grow, but the consensus going forward seems to be as summarized by the Petroleum Economist:
“Demand may be set to surge, but Asia’s largest gas importers remain firmly in control…in a market in which supply will outstrip demand until at least the middle of the next decade.”
Asia is the market for Alaska gas. It faces stiff competition there from Australia, other Pacific Rim countries, and the rest of the U.S. The Lower 48 is now exporting LNG, because it produces more than it needs. It is uneconomical to ship gas from Alaska to Europe, the other big market.
Market conditions could start to change by 2025, the Petroleum Economist says, and some other analysts predict that by 2030 or so the market could look considerably better for gas supplies from Alaska, but that is highly speculative.
“What happens to the Asian LNG market beyond the next five years or so may well depend on how quickly renewable energy is adopted, the advances made in energy storage, and whether gas becomes the bridging fuel to a renewables-powered future-at the expense of coal-that the gas industry hopes it will,” the Petroleum Economist noted.
Renewables – wind, solar and hydro – are the big unknown.
The Financial Times has labeled renewables “The Big Green Bang” and warned that “the shift to clean power has begun to accelerate at a pace that has taken the most experienced experts by surprise. Even leaders in the oil and gas sector have been forced to confront an existential question: will the 21st century be the last one for fossil fuels?”
Renewables now supply about a third of the electrical energy used by Germany, a leader in the shift away from fossil fuels. The growing demand for solar cells and wind turbines Germany helped spawn created market competition and brought production scales to levels that radically drove down costs.
“Solar power, once so costly it only made economic sense in spaceships, is becoming cheap enough that it will push coal and even natural-gas plants out of business faster than previously forecast,” the Bloomberg New Energy Finance outlook forecast in June.
No one is expecting solar or wind to put natural gas, a relatively clean fuel, out of business, but the falling costs of electric production via sun and wind are expected to cap natural gas prices, which is bad news for an inherently expensive Alaska gas pipeline.
“By 2040, wind and solar will make up almost half of the world’s installed generation capacity, up from just 12 percent now, and account for 34 percent of all the power generated,” Bloomberg predicted.
China at this time might be interested in gas, but it’s already all-in on renewables.
“China has more than a third of the world’s wind power capacity; a quarter of its solar power; six of the top 10 solar-panel makers; four of the top 10 wind turbine makers and more battery-only electric car sales last year than the rest of the world combined,” the Financial Times reported.
The presently poor market, and the high costs of the Alaska pipeline project, have started some wondering if shipment by sea might eventually prove the cheapest way to get Alaska North Slope gas to market.
The ice-reinforced Russian tanker, Christophe de Margerie, delivered over 75,000 tons of LNG from Norway to South Korea in August via the Northern Sea Route across the Arctic Ocean and through Alaska’s Bering Strait into the Pacific Ocean.
In the wake of the Russian delivery, the New York Times was pondering whether this is “the future of shipping as global warming melts sea ice.”
The Margerie, the Times said, made its delivery in 19 days, which got the gas from Norway to Korea about 30 percent faster than the standard shipping route through the Suez Canal.
Current projections are that regular and economically viable use of Arctic shipping is a couple of decades away, but a report prepared by the Copenhagen Business School noted “a broader interest in utilizing the Arctic as a viable transport route for liquid bulk. Additionally, several oil and gas companies operating in the Arctic without access to the pipeline network are acquiring their own vessels to transport goods.”
Russia, which sees Arctic development as a national imperative, has been driving the promotion of Arctic shipping. And The National Bureau of Asian Research hints that the partnering of Russia and China on LNG production could speed Arctic development.
“Nowhere is this more evident than with the Yamal liquefied natural gas project, which symbolizes the growing asymmetry in the energy relationship between
Russia and China. Located deep within Russia’s Arctic zone, the project has been subject to sanctions targeting Arctic development generally and Novatek specifically.
As a result, the project’s ability to move forward has been largely dependent on China’s participation throughout the value chain, including as an upstream equity partner, strategic investor, lender of last resort, LNG buyer, tanker operator, and even equipment supplier,” the think tank reported.
Yamal is an LNG plant 370 miles north of the Arctic Circle in which Novatek, Russia’s largest independent gas producer, is partnering with he China National Petroleum Corp. and Total, the French energy company.
Prudhoe Bay, Alaska’s biggest oil and gas complex, is about 250 miles north of the Arctic Circle.